Investors are always looking for growth in small-cap stocks like Ligand Pharmaceuticals Incorporated (NASDAQ:LGND), with a market cap of US$2.6b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, these checks don't give you a full picture, so I suggest you dig deeper yourself into LGND here.
LGND’s Debt (And Cash Flows)
LGND has built up its total debt levels in the last twelve months, from US$225m to US$636m – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$774m to keep the business going. On top of this, LGND has produced US$194m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 30%, indicating that LGND’s debt is appropriately covered by operating cash.
Does LGND’s liquid assets cover its short-term commitments?
Looking at LGND’s US$82m in current liabilities, the company has been able to meet these commitments with a current assets level of US$871m, leading to a 10.58x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Having said that, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Can LGND service its debt comfortably?
Since total debt levels exceed equity, LGND is a highly leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if LGND’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For LGND, the ratio of 4.78x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving LGND ample headroom to grow its debt facilities.
Although LGND’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for LGND's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Ligand Pharmaceuticals to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LGND’s future growth? Take a look at our free research report of analyst consensus for LGND’s outlook.
- Valuation: What is LGND worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether LGND is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.